Economic Analysis for Property and Business by tkv74755

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									Agriculture &
 Business
     Management

  Economic & Financial Considerations
           Due to Drought

                 Jeffrey E. Tranel
  Agricultural & Business Management Economist
                jtranel@colostate.edu
         A Few Basic Questions?


1. Where were you on January 1, 2002?
                A Few Basic Questions?

1.   Where were you on January 1, 2002?

2. How did you respond to the drought?
                A Few Basic Questions?

1.   Where were you on January 1, 2002?
2.   How did you respond to the drought?

3. Why did you respond as you did?
               A Few Basic Questions?

1.   Where were you on January 1, 2002?
2.   How did you respond to the drought?
3.   Why did you respond as you did?

4. Where are you now?
                A Few Basic Questions?

1.   Where were you on January 1, 2002?
2.   How did you respond to the drought?
3.   Why did you respond as you did?
4.   Where are you now?

5. Now what should you do?
  Where Were You on January 1, 2002?


Personally?
  – Age.
  – Health.
  – Children.
  – Retirement.
  – Other.
     Where Were You on January 1, 2002?

Personally?

Managerially?
    – On target.
    – According to plans.
    – Herd development.
    – Properly stocked.
    – Labor resource.
    – Machinery, buildings, fences.
    – Other.
     Where Were You on January 1, 2002?

Personally?
Managerially?

Financially?
    – Balance sheet.
       • Net worth.
       • Ratio analysis.
    – Current with loans.
  How Did You Respond to the Drought?


According to plans?
  – Herd development.
  – Herd size.
  – Marketing.
    How Did You Respond to the Drought?

According to plans?

Feed?
    – Purchased additional feedstuffs.
    – Moved cows to another state.
    – Sold excess feed.
    How Did You Respond to the Drought?

According to plans?
Feed?

Cattle?
    – Some cows.
       • Deeper culling.
       • Retained only very best females.
       • Sold cows, kept heifers.
    – Sold all cattle.
    – Purchased cattle.
    Why Did You Respond As You Did?


Personal situation.
Goals (plans).
Financial situation.
Lender.
Taxes.
Pasture/Feedstuffs.
          Where Are You Now?


According to plan.
Wondering.
                   Where Are You Now?

 Wondering.
 According to plan.

Better off financially.
Worse off financially.
                      Where Are You Now?

   Wondering.
   According to plan.
   Better off financially.
   Worse off financially.

Better off personally.
Worse off personally.
                      Where Are You Now?

   Wondering.
   According to plan.
   Better off financially.
   Worse off financially.
   Better off personally.
   Worse off personally.

All fences and buildings repaired.
Pastures rested.
          Where Are You Now?


Lender accepted management plan.
                  Where Are You Now?

Lender accepted management plan.

Taxes paid.
Tax liability exists (1033e, 451e, other).
                     Where Are You Now?

Lender accepted management plan.
Taxes paid.
Tax liability exists (1033e, 451e, other)

Retired.
Out of ranching but still working.
Financial Situation Due to 2002 Drought
              Remember:


With no farm profits and no other income,
          there is no money for

          principal repayment,
              family living,
              investments,
                   etc.
  Comment by Old Timer:




 “My Biggest Tax Problem
            Is
Not Paying Enough Taxes!”
          Have Carry-Over Sales?


If have “carry over” income and little/no
   profits, may want to recognize such
   income to offset current year expenses.
  – rather than continuing to carry forward
    income.
  – rather than pre-paying expenses.
                   Other?


• Do not elect accelerated depreciation.

• Use other profits to offset farm losses.
          Livestock Producers
        Feed Assistance Program

• Such payments must be included in the
  year of receipt.
          Livestock Producers
  IRS Code Sections 451(e) and 1033(e).

• Requirements of taxpayer.
  – Qualified farmer.
  – Uses cash method of accounting.
  – Sale would not have occurred except for
    drought.
          Tax Code Section 451(e)


• Primarily for sales of market/feeder animals.
• Allows for deferring recognition of forced
  sale income to the following year.
• Livestock sold due to drought, flood, or other
  weather related conditions.
• Area must be designated as eligible for
  assistance by the federal government.
         Tax Code Section 1033(e)


• Allows for the non-recognition of the gain on
  the sale of breeding livestock.
  – Horses qualify if used for draft, breeding, or dairy.
  – Poultry is expressly excluded from livestock.


• Animals sold in excess of normal numbers
  due to drought (involuntary conversion).
        Replacing Property Lost Due to
           Involuntary Conversion

• Replacement property must be purchased.
• The taxpayer's basis in the property is its cost.
• Replacement property acquired by gift, or tax-
  free exchange, is not eligible for deferral.
   – Since the basis of the property is not cost.
• Must be similar or related in service or use.
   – Functions in the same way.
      • Breeding cow and dairy cow do not qualify.
       Replacing Property Lost Due to
          Involuntary Conversion

If reinvestment in similar use property is not
        feasible because of soil or other
         environmental contamination,

     Livestock may be replaced by other
    property “used for farming purposes.”
           Toxic chemicals are the contaminant.
    Brucellosis infected cattle do not qualify (bacterial).
      Replacing Property Lost Due to
         Involuntary Conversion

The converted property must be replaced
 within a two-year period.
  – The period ends two years after the close of the
    first taxable year in which any part of the gain on
    the conversion is realized.
  – Replacement of the converted property must be
    completed by the end of the period.




   Sales in 2002 = Replacement by 31 Dec 2004
          Contact A Tax Professional


• Competent.
• Understands your situation.
  –   Business.
  –   Finances.
  –   Business goals.
  –   Personal goals.
  –   Personality.
                Now What?


 “To restock or not to restock?”
 Possible solutions.
                  Now What?


 Restock.
  – Herd back to original size.
  – New herd smaller than original.

  – Slowly.
  – Quickly.
               Now What?


 Re-stock slowly.
 – Buy a few cows each year.
 – Buy heifers rather than cows.
 – Run yearlings, then cows.
 – Convert to yearlings only.
                Now What?


 Re-stock quickly.
 – Full AUMs with cows.
 – Full AUMs with heifers.
    • Buy cows to replace open heifers.
    • Buy heifers to replace open heifers.
 – Yearlings then cows.
  How/What to Produce? and For Whom?


• Production environment.

• Marketplace.
                                   Cash Receipts


                     Cash Receipts from Marketings - Colorado 1991-2000


                 6,000,000
                 5,000,000
$1,000 dollars




                 4,000,000
                 3,000,000                                                Total Cash
                                                                          Receipts
                 2,000,000
                 1,000,000
                        0
                         91


                               93


                                      95


                                              97


                                                     99
                       19


                              19


                                     19


                                            19


                                                   19


                                                                 Bureau of Economic Analysis
                                           Year                  Farm Income and Expenses
Cash Receipts: Livestock and L/S Products


                   Cash Receipts: Livestock and Products - Colorado 1991-2000


                   4,000,000
                   3,500,000
  $1,000 dollars




                   3,000,000
                   2,500,000
                                                                           Livestock
                   2,000,000
                                                                         and Products
                   1,500,000
                   1,000,000
                     500,000
                           0
                           91


                                  93


                                        95


                                               97


                                                     99
                          19


                                19


                                       19


                                              19


                                                    19



                                             Year
                                                                 Bureau of Economic Analysis
                                                                 Farm Income and Expenses
            Cash Receipts: Miscellaneous Income


                  Cash Receipts: Miscellaneous Income - Colorado 1991-2000


                 600,000
                 500,000
$1,000 dollars




                 400,000
                 300,000                                                Misc Income
                 200,000

                 100,000
                      0
                       19 1
                       19 2
                          93
                          94
                          95
                          96

                       19 7
                       19 8
                          99
                          00
                          9
                          9




                          9
                          9
                     19




                       19
                       19
                       19
                       19




                       20


                                                              Bureau of Economic Analysis
                                                              Farm Income and Expenses
                                       Year
                  Total Receipts and Other Incomes


                      Cash Receipts: Total Receipts - Colorado 1991-2000


                 6,000,000
                 5,000,000
$1,000 dollars




                 4,000,000                                           Total Cash
                 3,000,000                                           Receipts/Other
                                                                     Income
                 2,000,000

                 1,000,000
                        0
                         19 1
                         19 2
                         19 3
                            94
                            95

                         19 6
                         19 7
                         19 8
                         20 9
                            00
                            9
                            9
                            9



                            9
                            9
                            9
                            9


                                                               Bureau of Economic Analysis
                       19




                         19
                         19




                                                                      Bureau of Expenses
                                                               Farm Income andEconomic Analysis
                                                                      Farm Income and Expenses

                                         Year
                 Cash Expenses: Livestock Purchased


                                    Livestock Purchased - Colorado 1991-2000


                 1,800,000
                 1,600,000
$1,000 dollars




                 1,400,000
                 1,200,000
                 1,000,000
                   800,000                                                                         Livestock Purchased
                   600,000
                   400,000
                   200,000
                         0
                             1991
                                    1992
                                           1993
                                                  1994
                                                         1995
                                                                1996
                                                                       1997
                                                                              1998
                                                                                     1999
                                                                                            2000

                                                         Year                                       Bureau of Economic Analysis
                                                                                                    Farm Income and Expenses
                    Cash Expenses: Purchased Feed


                           Purchased Feed-Colorado 1991-2000


                 900,000
                 800,000
$1,000 dollars




                 700,000
                 600,000
                 500,000                                         Purchased Feed
                 400,000
                 300,000
                 200,000
                 100,000
                       0
                        91
                        92

                        93
                        94
                        95

                        96
                        97

                        98
                        99
                        00
                      19
                      19

                      19
                      19
                      19

                      19
                      19

                      19
                      19
                      20

                                     Year                      Bureau of Economic Analysis
                                                               Farm Income and Expenses
                           Cash Expenses: Petroleum


                                   Petroleum - Colorado 1991-2000


                 180,000
                 160,000
                 140,000
$1,000 dollars




                 120,000
                 100,000
                  80,000                                                   Petroleum
                  60,000
                  40,000
                  20,000
                       0
                       91


                              93


                                      95


                                              97


                                                     99
                     19


                            19


                                    19


                                            19


                                                   19




                                                                    Bureau of Economic Analysis
                                           Year                     Farm Income and Expenses
                           Cash Expenses: Hired Labor


                                Hired Labor - Colorado 1991-2000


                 600,000
                 500,000
$1,000 dollars




                 400,000
                 300,000                                            Hired Farm Labor

                 200,000
                 100,000
                      0
                        91
                        92
                        93
                        94
                        95
                        96
                        97
                        98
                        99
                        00
                      19
                      19
                      19
                      19
                      19
                      19
                      19
                      19
                      19
                      20
                                                                   Bureau of Economic Analysis
                                        Year                       Farm Income and Expenses
Cash Expenses: Other Production Expenses


                           Other Production Expenses - Colorado 1991-2000
                        (repairs, depreciation, interest, taxes, rents, chemicals)


                  2,500,000

                  2,000,000
 $1,000 dollars




                  1,500,000
                                                                                           Other
                  1,000,000                                                                Expenses

                   500,000

                         0
                          91

                          92

                          93

                          94

                          95

                          96

                          97

                          98

                          99

                          00
                        19

                        19

                        19

                        19

                        19

                        19

                        19

                        19

                        19

                        20
                                                                       Bureau of Economic Analysis
                                                 Year                  Farm Income and Expenses
                    Cash Expenses: Total Expenses


                             Total Expenses - Colorado 1991-2000



                 6,000,000

                 5,000,000
$1,000 dollars




                 4,000,000

                 3,000,000                                                   Total
                 2,000,000                                                   Expenses

                 1,000,000

                        0
                         91

                         92

                         93

                         94

                         95

                         96

                         97

                         98

                         99

                         00
                       19

                       19

                       19

                       19

                       19

                       19

                       19

                       19

                       19

                       20

                                           Year                    Bureau of Economic Analysis
                                                                   Farm Income and Expenses
Cow Calf Returns & Cattle Inventory


                              COW -CALF RETURNS
                            AND CATTLE INVENTORY
$ Per Cow                                 U.S., Annual                    Mil. Head
100                                                                           135

                                                                              130
 50                                                                                   Cow-Calf
                                                                              125
                                                                                      Returns

  0                                                                           120

                                                                              115
 -50                                                                          110
                                                                                      Cattle
                                                                              105
-100                                                                                  Inventory
                                                                                      Jan 1
                                                                              100

-150                                                                           95
       1974   1977   1980   1983   1986    1989   1992   1995   1998   2001   Down ½ percent
                                                                              in 2002

July 2002
              AVERAGE RETURNS TO CATTLE FEEDERS
                      Feeding 725 Lb. Steers, S. Plains, Monthly
 $ Per Head
100


 50


  0
                                                                                                 -$20
 -50


-100

                                                        Latest Data: September 2001
-150
       1992   1993   1994   1995   1996   1997   1998      1999    2000    2001


                                                                                       C-P-22
                                                                                      10/09/01
Realized Net Income: Colorado, 1991-2000


                            Realized Net Income - Colorado 1991-2000



                  800,000
                  700,000
                  600,000
 $1,000 dollars




                  500,000
                  400,000                                              Realized
                  300,000                                              Net
                  200,000                                              Income
                  100,000
                       0
                        91

                        92

                        93

                        94

                        95

                        96

                        97

                        98

                        99

                        00
                      19

                      19

                      19

                      19

                      19

                      19

                      19

                      19

                      19

                      20
                                           Ye ar
             Colorado Agriculture


• Stagnant Income Growth - 2.9%

• Increasing Costs - 3.5%

• Declining Net Incomes
      Possible Solutions: Production


• Increase production
   – Production/harvest practices

  – Technology

  – Precision farming techniques
       Possible Solutions: Marketing


• Marketing
  – Long-term Profit vs. Short-term Windfalls

  – Develop Market Plans and Strategies
     • Marketing goals
     • Available tools
        Possible Solutions: Marketing


• Consider alternative markets
  – Contract production
  – New markets for current products
  – New uses for current products
  – Shelf life enhancement
  – Engineered products (characteristics)
  – Processing
  – Packaging
           Possible Solutions: Financial


• Understand Financial Situation-Financial
  Statements
  –   Liquidity
  –   Profitability
  –   Solvency
  –   Financial Efficiency

• Unit Cost of Production-Enterprise Budgets
  – Know your costs
  – Manage the costs
 Possible Solutions: Risk Management


• Enterprise Diversification
  – Different crops
  – Combinations of crops and livestock
  – Different end points
  – Different types-same crop
  – Value-added/product differentiation
  – Different income sources
   Possible Solutions: Risk Management


• Pricing Tools
  – Forward Contracts

  – Futures and Options

  – Direct Marketing
   Possible Solutions: Risk Management


• Debt Management
  – Debt reduction
  – Refinance loans
  – Adjust terms of the loan
  – Debt consolidation
  – Adjust payments dates
   Possible Solutions: Risk Management


• Debt Carrying Capacity - Rules of Thumb
  –   Cropland (Dryland) - $125-$150/acre
  –   Cropland (Irrigated) - $800-$900/acre
  –   Cow/Calf - $300-$400 per cow
  –   Dairy - $1,000-$1,200 per producing cow

• RULES OF THUMB
  – Intended as a general guideline
  – Many variables impact these numbers
      (market conditions, price cycles, interest rates, inflation, location,
      management ability, etc.)
  Possible Solutions: Risk Management


• Legal
   – Estate planning
  – Agricultural contracting
  – Renegotiate leases
  – Government laws and regulations
Enterprise Diversification - What Is It?

    An increase in the number of
  enterprises and/or products sold.

  Additional ways to use available
              resources.
   Enterprise Diversification - Benefits

• Reduces dependency on the production and
  price of a single (or fewer) products.
• May reduce income variability.
• May increase net revenues.
  –   Increase net worth.
  –   Financial stability.
  –   Opportunities to expand and broaden investments.
  –   Taxes.
• Greater use of human resources.
    Enterprise Diversification - Costs

May mean not being a specialist,
 (I run cows)
but rather being a generalist.
 (I have a land resource producing cattle, hay,
 dudes, and elk).
     Enterprise Diversification - Costs

May mean that the owner does not get to
brag about “having the heaviest calves” or
  “topping the sale.”

• Reduced weaning weights in order to sell in a
  variety of markets.
• Moving calving and weaning dates to better fit
  off-ranch job schedule.
    Enterprise Diversification - Costs

May have to expend some monies in the
short-term in order to have long-term gains.
 Enterprise Diversification - Costs

More Enterprises = More Management
    Enterprise Diversification - Costs

May have to relinquish some control of
business and/or daily life.
       Enterprise Diversification

• Commodities and Commodities.

• Commodities and Products.
    Enterprise Diversification - Examples

•   Calves - multiple selling times.
•   Calves, yearlings, fats.
•   Cattle and sheep.
•   Cattle and crops.
•   Livestock and Dudes.
•   Livestock and Wildlife.
•   Ranching and 4-Wheeling, Camping, Agri-
    business, and Non-Ag Business.
  How/What to Produce? and For Whom?


Marketplace.

Production environment.
  General U.S. Population Information

• U.S. Population - 282 Million People
  – 3rd Largest Population (China and India > 1 billion)
• Expected Annual Growth Rate - 1 %
• Median Per Capita Income - $21,684
• Median Household Income - $46,738
        General Colorado Population

• Colorado Population - 4.2 Million People
     Ranks 25th of all the states
• Expected Annual Growth Rate - 2 %
     U.S. - 1%
• Median Per Capita Income - $24,203
     U.S. - $21,684
• Median Household Income - $59,747
     U.S. - $46,738
     Ethnic Diversity - 2000 & 2025

• Population Percentages by Race
                     U.S.     Colo.
   White            74 66     80 74
   Black            11 12      4 5
   Indian            1 1       1 1
   Asian             4 6       2 3
   Hispanic         11 15     12 17
       Age - America Is Graying

• Median Age:
   1988 - 28 years
   2000 - 36 years
   2050 - 50 years (projected)
        Households Are Changing

• Single person households
• Smaller families
• Two wage earner families
      Income - 1999 Poverty Rates

U.S. Poverty Rate
  – Lowest since 1979 (12.6 %)


  – Highest Poverty - New Mexico (20.8 %)
  – Lowest Poverty - Maryland (7.6 %)
  – Colorado - 8.6 % (Rank 44th)
   Income-1999 Household Incomes

Median Household Income
  – U.S. = $39,657
  – Highest on Record


  – Highest Income - Alaska ($51,046)
  – Lowest Income - Arkansas ($28,398)
  – Colorado - $46,950 (Rank 5th)
                          U S BEEF CONSUMPTION
                          Per Capita, Retail Weight, Annual
Pounds
90



80



70


60



50
     1978   1981   1984      1987   1990   1993   1996   1999   2002


                                                                        M-C-15
                                                                       10/25/01
             U S EXPENDITURES FOR MEAT & POULTRY
                            Percent of Disposable Income
Percent
3.0

2.5                                                                               Beef


2.0
                                                                                  Pork
1.5
                                                                                  Broiler
1.0

0.5                                                                               Turkey

0.0
      1975    1978   1981    1984   1987   1990   1993   1996   1999


                                                                        M-C-16
                                                                       10/25/01
    Non-agricultural Demand for Land.

• Houses and shopping centers.
• Open spaces.
• Land trusts, conservation easements, etc.
           Tools For Decision Making?


•   Partial budgeting.
•   “1033e.” (Excel Template, CSU)
•   “What to Do With My Cows.” (Excel Template, CSU)
•   Re-Stocking Your Herd.” (Excel Template, UofA)
•   “Right Risk.”
•   Other.
            Typical Partial Budget


Positive Outcomes          Negative Outcomes
  – Reduced Costs            – Reduced Returns
  – Increased Returns        – Increased Costs

  – Total Positive            – Total Negative




          Positive – Negative = Net Impact
1033e Decision Tool
   (An Excel Template)
1033e Decision Tool
   (An Excel Template)
1033e Decision Tool
   (An Excel Template)
1033e Decision Tool
   (An Excel Template)
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